Chapter 17: Open-Market Macroeconomics Flashcards

1
Q

Define ‘Balance of trade’.

A

The value of exports minus the value of imports. Also called next exports, NX.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define ‘Trade deficit’.

A

A negative balance of trade; a greater amount of imports than exports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define ‘Trade surplus’.

A

A positive balance of trade; a greater amount of exports than imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define ‘Foreign direct investment (FDI)’.

A

Investment when a firm runs part of its operation abroad or invests in another company abroad.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define ‘Foreign portfolio investment’.

A

Investment funded by foreign sources but operated domestically. I.e. stocks or bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define ‘Net capital outflow’.

A

The net flow of funds invested outside of a country.

Direct investment + portfolio investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define ‘Balance-of-payments identity’.

A

An equation that shows that the value of net exports equals net capital outflow.
NX=NCO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define ‘Exchange rate’.

A

The value of one currency expressed in terms of another currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define ‘Exchange-rate appreciation’.

A

An increase in the value of a currency relative to the value of another currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define ‘Exchange-rate depreciation’.

A

A decrease in the value of a currency relative to other currencies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define ‘Floating exchange rate’.

A

An exchange rate whose value is determined by the market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define ‘Fixed exchange rate’.

A

An exchange rate that is set by the government, instead of determined by the market.
Usually set to be in relation to another stable currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define ‘Nominal exchange rate’.

A

The stated rate at which one country’s currency can be traded for another country’s currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define ‘Real exchange rate’.

A

The value of goods in one country expressed in terms of the same goods in another country.
The real XR is the nom. XR corrected for the price levels in the domestic and foreign country.
Measured in terms of goods instead of currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How do net exports NX respond to the value of the exchange rate XR?

A

When the XR is high, domestic goods are expensive and foreign goods are cheap, so net exports are low. When the exchange rate is low, net exports are high.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How are the balance of trade and net capital outflow related?

A

Through the balance-of-payments identity which states that NX=NCO. This is an accounting identity; if a country has an imbalance of trade (positive net exports), it means that it has lent money to the rest of the world (positive capital outflow) to pay for these goods.

17
Q

How are net capital outflows determined?

A

By the demand for and supply of net capital outflow.
The supply of net capital outflow is national savings less domestic investment. The demand for net capital outflow is determined by the domestic interest rate and the foreign interest rate.

18
Q

What happens when the domestic interest rate is high? The foreign interest rate?

A

When the domestic interest rate is high, net capital outflow is low, because foreign money flows into the country.
When the foreign interest rate is high, net capital outflow is high, because money flows out of the country to take advantage of high returns.

19
Q

Various events can influence the international supply and demand for loanable funds. Describe some.

A

An increase in confidence in an economy will cut net capital outflows and lower the interest rate.
A decrease in savings from an increase in the government deficit will shift the supply curve for loanable funds to the left, increasing the interest rate and decreasing net capital outflows.

20
Q

What determines the XR?

A

It is determined by demand and supply for domestic currency. Demand and supply are influence by preferences for domestic and foreign goods and services, the domestic interest rate, the foreign interest rate, and perceived riskiness of domestic and foreign investment.

21
Q

In terms of monetary policy, a fixed exchange rate necessarily means that monetary policy will …?

A

Not have any effect.

Any change to the money supply has to be counteracted by government actions on the foreign-exchange market.

22
Q

Monetary policy is possible under a ____ XR.

A

Flexible.

23
Q

If the real exchange rate is 1, then a good can be exchanges in one country directly for a good in another country. If this is the case, we say there is …?

A

PPP (purchasing power parity) between the two countries.

24
Q

Where does NCO=NX come from?

A

S=S_private + S_public
S=I+NCO
S=I+NX

25
Q

What is the equation for rXR?

A

rXR = nXR x (domestic price level / foreign price level)